• For Fundamental Reform of the European Economic and Monetary Union

  • By Axel Troost | 10 Mar 16 | Posted under: European Union
  • How should the European Monetary Union be reformed?

    The president of the European Commission, Jean-Claude Juncker, ‘in close cooperation’ with the presidents of the European Council, the Eurogroup, the European Central Bank (ECB), and the European Parliament, has published a report entitled Completing Europe’s Economic and Monetary Union. Also known as the Five-Presidents’ Report,1 it puts forward proposals aimed at completing the Economic and Monetary Union (EMU); they are proposals that the Party of the European Left for obvious reasons cannot support.

    The Five Presidents’ proposals ignore the major causes of the crisis and the relatively adverse economic developments that have occurred in Europe ever since. They also neglect to call for key measures that could stabilise the euro area. Instead, the presidents advocate further labour market deregulation, reductions in wages, and a continuation of austerity. Their proposals amount to the intensification and institutionalisation of austerity, wage reductions, and cuts to social services. The result would be permanently dismantled workers’ rights, the reduced importance of public goods, increased inequality, and further negative economic effects.

    What we have recently seen in the policy of ‘combatting divergence’ in Greece has strengthened us in our conviction: Austerity, which involves cuts to social spending with the aim of improving competitiveness, is not an acceptable solution to divergences within the EU. It will only aggravate the damage inflicted on the democratic foundations of the EU’s Member States and those of its institutions.

    The Party of the European Left should take to heart the goals enunciated by Alexis Tsipras, Greece’s re-elected Prime Minister: ‘We want to change the Eurozone. So there are three things that we need to do. First, we need to develop alternative ideas. Second, we have to deploy a different crisis policy based on these ideas. And third, we inevitably need to change the EU’s institutions; and, as such, the entire foundation of the European Union.’2

    This is a call to work for a return to the origins of the EU – and especially of the EMU. It is all the more relevant in the face of the growing tendency within the left to believe that there is no room in the EU and the Eurozone for social reform policies. In essence the issue is whether Europe would be better off without the EU because it tends to intensify its frequently neoliberal orientation, or whether the EU is merely a reflection of the neoliberal policy orientation of its Member States.

    The EU is not per se a neoliberal project. Responsibility for the EU’s many wrong-headed policies largely lies with the European Council, or, more precisely, with the governments that dominate it. The central administration in Brussels only plays a secondary role here, as it is the European Council that shapes and enacts the EU’s neoliberal policies. Changing this situation means challenging the hegemonic and, recently, aggressive and domineering role played by specific neoliberal governments, mostly notably the German government. As such, building another Europe requires focusing on the political actors in Berlin and not primarily targeting the political elite and bureaucrats in Brussels.

    The institutions of ‘European governance’, too, are not the cause of persistent calamities such as the euro crisis, the banking crisis, unemployment, and militarisation, etc. Therefore the re-nationalisation of policy cannot be the alternative.

    Moreover, if specific hegemonic governments are responsible for shaping the EU’s neoliberal policies, these same governments can hardly be expected to create more socially just European policies at the domestic level. The idea that the nation-state level offers more favourable ‘conditions for struggle’ is not credible, for even the protests of hundreds of thousands of people in the southern European countries hardest hit by austerity have not been able to change EU policy. Moreover, many EU Member States are currently faced with a rise of the extreme right and right-wing populism.

    Reforming the Economic and Monetary Union

    It goes without saying that we need more than just economic growth – let alone economic growth based on competitiveness – to overcome the social and economic crisis. Moreover, approaches need to be developed in crisis countries that encourage reconstruction and that take seriously the requirements of socio-ecological transformation, while still reflecting specific national contexts. In Germany, for example, this would mean a focus on reviving the domestic market – particularly by expanding high­quality education, and health and care services; Greece, on the other hand, would need to (re)build working structures of industrial production and service provision, some of which could be aimed at export.

    The reconstruction of countries in crisis needs to be linked to fundamental monetary union reform; this reform will have to enable Germany’s economy to overcome its one-sided focus on exports, which has equally negative consequences for the economies of crisis countries and for workers in Germany.

    Reforms implemented at the EU level and of the Eurozone always produce winners and losers. However, the dividing line should no longer run along national borders but should be drawn between social strata. People on low and middle incomes, recipients of transfer payments, school and university students, immigrants, and refugees must benefit from such reforms no matter where they live in Europe.

    The current strategy has clearly failed. The internal devaluation, that is, the forced depression of wages and prices has increased the debt level of households, businesses, and governments in crisis countries. Whenever cuts are implemented, people lose their jobs because no one can afford to buy the products they produce. Clearly, the lack of consumer demand is a principal cause of the EU’s intractable recession. Businesses are not investing enough in new plants or equipment, which results in low wages and too few jobs. The alternative to a policy of consolidation would be a political decision to stimulate social consumption through investment and thus bring the economy back up to speed.

    This requires a tax-financed spending policy. The German Trade Union Confederation, for example, has proposed a Marshall Plan for Europe which calls for additional annual investment amounting to 260 billion euros (about two per cent of GDP) to be made available over a period of ten years.3 This policy would be supported by a European Future Fund that would issue bonds guaranteed by participating Member States. The initial capital for the fund would come from a one-off Europe-wide levy on capital.

    Financial and banking union

    The general view of banking unions is undoubtedly misleading; it ignores the disciplinary aspect of such unions and assumes that they provide unconditional aid programmes to failed banks. However, combining banking regulation with strong rights of intervention for supervisory bodies represents an essential basis for the European Monetary Union. In fact, these approaches are vital for the success of the European Central Bank’s monetary policy. If the EMU is to work, demand, time and savings deposits must be similarly secured throughout the union; regardless of whether these deposits are held by a Spanish, Austrian, or German bank, they all form part of the money available to the ECB. This is why savers throughout Europe need to be able to assume that their deposits are more or less equally secure no matter where they are held. This situation also removes incentives to quickly transfer funds across national borders. Clearly, the vulnerability of banks to speculative transactions (which also threaten customers’ deposits) can be resolved through banking discipline. Consequently, banking union can help prevent future systemic bank crashes and the socialisation of banks’ losses; as such, it can ensure that losses from failing banks are no longer passed on to taxpayers.

    We reject the current approach to a European banking union. Other political parties regularly commit themselves to the principle that ‘tax payers should never again be held hostage by banks and speculators’. This is reflected in calls by bourgeois parties and European social democratic parties for a significant increase in capital owners’ liabilities when it comes to the capital held by banks and funds. However, the European banking system faces huge problems. On the one hand, it faces a massive lack of capitalisation, and on the other, it is characterised by a large volume of non-performing loans and worthless papers amounting to more than one billion euros. Clearly, the established parties have been unable to demonstrate that the self-healing powers of the market will bring about the necessary reforms without resorting to intervention.

    However, it would be wrong to deny the importance of the recent reforms that have been made to EU financial market regulation. These reforms have led to the standardisation and strengthening of controls, increased equity, and a means of dealing with ailing financial institutions.

    The form of banking union that is currently being pieced together is aimed at preventing ailing banks from holding debt-ridden nation-states hostage and vice versa. The fact that the European Central Bank is to monitor major European banks and that it will be able to put those which no longer meet the requirements into liquidation certainly constitutes progress. But if liquidations are accompanied by ‘bail-ins’ for shareholders and creditors who are only required to cover part of the costs involved, then the burden of rescuing failing banks will continue to be assumed by state budgets, and thus taxpayers. Along with counteracting the depressive downward trends and stagnation afflicting some countries, banking reform is one of the most pressing issues in Europe. As long as the banking crisis in crisis-stricken countries remains unresolved, it will be impossible to overcome the credit crunch, and economic recovery will remain an illusion.

    Agreement on real banking restructuring is therefore an important step. However, although we are right to reject the current form of banking union (because it leaves too many questions unanswered), we have to let people know that we are doing more than just rejecting the current system and have been developing workable alternatives.

    Even if we reject banking union in its current form, the existence of global networks of financial institutions means that we must be open to sensible Europe-wide regulatory frameworks for the supervision and liquidation of failing large banks and also to a form of common bank deposit guarantee system that takes account of different national contexts. A return to the nation-state is not an option.

    Fiscal union

    The sharp increase in sovereign debt is not the cause of the crisis; rather it is a result of the drastic reduction in tax revenues, the bank bailout measures, and the anti-recessionary expansion policy. However, as soon as sovereign debt rose, the same financial institutions that benefited from rescue measures used the imbalances within the Eurozone to speculate against the weakest link in the chain.

    Since then, EU Member States have once more significantly reduced their budget deficits; but this has only slightly reduced their need for credit. In order to protect democracy, the state’s independence from financial markets, and economic stability in Europe, a debate on the reform of public financing would be far more important than implementing a debt haircut. Borrowing by individual euro states should therefore be communitised, firstly through Eurobonds, as this would enable all of the euro states to borrow at the same relatively low interest rates and to undertake debt restructuring. In order to prevent abuse, access to Eurobonds should be subject to conditions, which do not have to be repressive; they could, for example, include a cap on tax cuts. However, before this is done, the economically strong countries in the Eurozone would have to make available for a European growth and investment programme the interest advantage they accrued during the panicked rush to buy safe government bonds. In Germany alone, this advantage amounts to about 100 billion euros. The same should be done with the profits that the ECB made through bond purchases and which have been distributed among the EU’s Member States.

    Debt ceilings are the wrong approach to budgetary control. However, amendments to Germany’s Basic Law at the domestic level and the Fiscal Compact at the European level have put debt caps in place; this makes it all the more important to increase government revenues. The growing gap between rich and poor means that significantly more revenues are needed, particularly from a one-off capital levy, and, in Germany, by reviving the wealth tax. Other EU states would have to follow suit and raise their taxes on large holdings of capital at a comparable level. In addition, Germany needs to introduce a financial transaction tax of at least 0.1 per cent on trading stocks, bonds, currency, and derivatives together with the other EU states that are prepared to do so. Also, corporate tax avoidance and tax evasion need to be stopped.

    An extensive programme of public investment is required in order to counteract the risks of another recession. A different understanding of the Stability and Growth Pact (SGP) has to be asserted. The SGP is a rule-based framework with which to coordinate national tax policies within the EMU. It was established to guarantee sound public finances – a prerequisite to the proper functioning of the EMU. A re-balancing and re-distribution of EU funds would help boost growth in the EU and strengthen social, territorial, and economic cohesion in Europe, instead of letting it drift further apart through the current policies of austerity and social cuts.

    This investment should form part of a long-term strategy to promote solidarity and environmental sustainability and be implemented at both the domestic and the EU level. It needs also to be accompanied by an ambitious plan to promote investment in the countries most affected by the crisis. The European Investment Bank, which can already issue bonds to finance its activities, could provide the large-scale financing needed for these programmes. In addition, private investment would also be needed transitionally in crisis countries, and this would require a system of state incentives that steer investment in a direction that corresponds to the objectives (which would also need defining) of a modernised economic structure. There are various instruments that could be used to steer private investment, including a country’s development plans and regional planning programmes, and these should be developed into long-term approaches to public infrastructure.

    In terms of growth, the austerity policies demanded by the economic and social policies of the EU and the IMF are economically counterproductive. In social terms, furthermore, these policies are dangerous because they are driving European society into poverty and leading to greater social polarisation. Furthermore, against the background of the social tensions aggravated by the crisis, the austerity measures are breeding political tensions – if not political instability – which we especially see in the rise of right-wing populism.

    Political union

    The EMU was flawed from the very beginning because the unification of monetary policy was not accompanied by coordinated economic, social, and tax policies. Moreover, under competitive conditions a single monetary policy for a group of countries with quite different economic structures, labour markets, and business environments necessarily magnifies the differences. In the current crisis, the EU – and the Eurozone in particular – is reaping the consequences of the model it has adopted. Competition creates only one or few winners; and winners only exist if there are also losers. Another inevitable consequence of market logic is that losers are punished by markets, go bankrupt, and disappear. But where should the EU Member States that lose this race disappear to? Should Greece disappear from ‘the market of states’? Should the workforce of ‘Greece Ltd’ (i.e., the Greek population) search for a new territory?

    The extent to which competition has caused the Eurozone countries to diverge is clear from the dramatic differences in trade balances within the EU. It is above all Germany that has outcompeted its European rivals through its aggressive focus on exports based on its low-wage sector, wage squeezing, and dismantling of the welfare state (through Agenda 2010, retirement at 67, etc.). Between 2000 and 2010, Germany amassed an export surplus of more than 1,000 billion euros, most of which came from its European ‘partners’.

    In return, other countries suffered import surpluses, for surpluses in one country always mean deficits in another. Between 2000 and 2010, Greece and Portugal alone, two countries plagued by crisis, developed a current account deficit of 377 billion euros and had to borrow most of this money from abroad. Thus the Eurozone crisis is first and foremost an external debt crisis of entire countries (including the foreign debt held by private households, banks, and companies) and not primarily a sovereign debt crisis. Crisis countries of course also have considerable homemade problems (such as Greece’s tax administration and Ireland’s business tax dumping).

    In order to truly overcome the huge current account imbalances that exist in the Eurozone, we propose replacing the EU’s Stability and Growth Pact with a ‘European Transfer Union’. Alongside this, new instruments are required to (re-)finance public budgets and rescue them from the diktats of decisions made by private investors. A European Transfer Union would need to begin with a mandatory cap on current-account imbalances. To achieve this, multi-level procedures of sanctions and incentives would have to be established. The resultant fines would be paid into a fund used to finance projects for structural change and to compensate for current account imbalances in surplus and deficit countries.

    In Germany, this would mean strengthening domestic purchasing power by raising wages. This policy would not only lead to increased imports; it would also improve the export opportunities of Germany’s European partners and at least begin to mend the inequitable distribution of income in Germany. Some of the instruments to accomplish this would be a minimum wage, increased social transfer payments, and more public investment. Recent labour market ‘reforms’ (involving temporary work, unemployment benefits, retirement at 67, etc.) would have to be overturned, and there needs to be a general strengthening of the workers’ side in collective bargaining.

    Social imbalances therefore have to be taken into consideration in combatting macroeconomic imbalances. For only if the mechanisms are focused at least as strongly on improving domestic demand in countries with large current account surpluses as they are at reducing deficits in other countries can the inequalities be reduced along a path of growth and prosperity. In countries with low domestic demand and consequent current account surpluses regulatory frameworks are needed for above-average increases in wages, increased consumer demand, and private and public investment.

    There must be an end to the narrow focus on interventions into wage development and collective bargaining, as well as wage depression. Instead, collective bargaining autonomy, binding coverage, and industry-wide agreements need to be strengthened. This coordination of economic policy has to contribute to an upward convergence of social standards and workers’ rights. It must be accompanied by a labour-market policy to counteract the growth in atypical forms of employment in Europe. The EU’s social dimension has to be expanded. Finally, all measures and recommendations within the framework of economic governance should strengthen the European social model and not nullify or undermine national social systems.

    Progressive economic policy coordination means democratic economic policy coordination. This goes hand in hand with increasing the European Parliament’s authority. Consequently, Die LINKE rejects policies that give the EU Commission’s bureaucracy new areas of authority and powers of intervention, just as much as it rejects ‘pacts’ and ‘treaties’ that are agreed on outside of parliaments and that circumvent proper European legislative processes. The social partners have to fully participate in economic governance.

     

    Literature

    Bischoff, Joachim, Björn Radke and Axel Troost, ‘Industrie der Zukunft? Wertschöpfung zwischen De-Industrialisierung und vierter industrieller Revolution’, Supplement to Sozialismus 6, (2015), http://www.sozialismus.de/vorherige_hefte_archiv/supplements/%20liste/detail/artikel/industrie-der-zukunft/.

    Bischoff, Joachim, Thomas Händel, Björn Radke, Axel Troost, and Harald Wolf, ‘Rückkehr zur Drachme ist keine Lösung’, Neues Deutschland, 19 August 2015, http://www.transform-network.net/en/focus/greece-decides/news/detail/Programm/return-to-drachma-is-no-solution-1.html.

    Deutscher Gewerkschaftsbund (2012), Ein Marshallplan für Europa, http://www.dgb.de/themen/++co++64e1dc32-4081-11e2-9bfe-00188b4dc422.

    Troost, Axel, ‘Für ein Europa mit Zukunft’, Sozialismus extra, February 2014.

    Troost, Axel, ‘Überschätzte Spielräume’, Neues Deutschland, 26 August 2015, https://www.neues-deutschland.de/artikel/982480.ueberschaetzte-spielraeume.html.

    Troost, Axel, Milliarden-Geschenke an Familiendynastien bei der geplanten Erbschaftsteuerreform (edited and full version), 27 September 2015, http://www.axel-troost.de/article/8693.milliarden-geschenke-an-familiendynastien-bei-der-geplanten-erbschaftsteuerreform.html.

    Notes

    1. http://ec.europa.eu/priorities/sites/beta-political/files/5-presidents-report_en.pdf

    2. From his address at the conference ‘Can the Euro Be Saved?’ held at the Lyndon B. Johnson School of Public Affairs on 4 November 2013 in Austin, Texas. See Alexis Tsipras: ‘Wir Europäer’, Le Monde Diplomatique, 13 December 2013, http://www.monde-diplomatique.de/pm/2013/12/13.mondeText1.artikel,a0046.idx,10/(in German).

    3. Ein Marshallplan für Europa. Vorschlag des Deutschen Gewerkschaftsbundes für ein Konjunktur-, Investitions- und Aufbauprogramm für Europa, 2012, http://www.dgb.de/themen/++co++64e1dc32-4081-11e2-9bfe-00188b4dc422


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